Real Estate Escrow Definition

An escrow is a neutral third-party who holds funds until conditions are met.

Real estate escrow means putting something, such as a deed or money, in the custody of a neutral third party until certain conditions are met, according to the website Realty Times. Escrow or title companies often oversee a real estate transaction, from initial deposit to final funding, to ensure a smooth process. Once the transaction is complete, a loan servicing company may setup an escrow account on behalf of the borrower in which a portion of the borrower&amp;rsquo;s monthly payment is deposited for property taxes and insurance.

Significance

All parties to a real estate transaction need reassurance that no exchange of funds or property will take place until all conditions are met. Written instructions submitted by the buyer and seller or the borrower and the loan agent must be followed by the escrow officer, according to the Total Real Estate Solutions website. An escrow account, in which a monthly portion of the borrower&rsquo;s payment is deposited, guarantees a lender that the property taxes and hazard insurance will always be paid.

Function

Either a real estate agent or the principals in a real estate transaction submit a purchase agreement to the escrow holder. The escrow holder writes instructions based on the conditions of the purchase agreement and submits timelines for the real estate agent or principals to follow. An escrow holder can receive money, payoff requests and other invoices to be paid as part of the instructions. An escrow account for the payment of property taxes and hazard insurance operates similarly to a savings account. Each month a deposit is made. When the property taxes or insurance become due, the lender will withdraw funds from the escrow account to pay the expenses on the borrower&rsquo;s behalf. Any money remaining in the escrow account at the end of the year in excess of the minimum operating funds required by law is refunded to the borrower.

Escrow Holders

Real estate agents and banking institutions usually recommend an escrow or title company as the escrow holder. A real estate attorney may provide services as an escrow holder. All parties to the transaction must agree upon the escrow holder.

Costs

In California, escrow companies are licensed and regulated by the Department of Corporations. Fees are not set by law. Escrow and closing costs can make up a component of 3 to 6 percent of the total purchasing costs, according to Escrowhelp.com. Typically escrow fees vary depending on the purchase or refinance amount and the complexity of the real estate transaction. You can either shop online to compare costs or talk to several escrow officers for more accurate pricing. Escrow accounts for payment of property taxes and insurance typically function as a savings account and may actually yield a small yearly interest for the borrower.

Other Considerations

If you have an escrow account for the payment of property taxes and insurance, the lender will review the account every year and make adjustments to the monthly contribution in anticipation of an increase or decrease in costs. A statement will be sent to the borrower detailing the new amount that will be added to the monthly principal and interest loan payment.

About the Author

Angela Lam Turpin has been a writer for 20 years. Her articles and essays have appeared in "San Jose Mercury News," "The Sun," and in the book, "Wild Child: Girlhoods in the Counterculture" (Seal Press). She is a licensed Realtor (CA Dept of Real Estate License #01201734) experienced with residential sales, mortgage loans, and foreclosures.

Photo Credits

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